Is the party ending or just getting started for buy-to-let? Landlords see rents rise just £5 in a year - but house price boom pushes average total return to almost £17,000

Buy-to-let landlords may be piling into the market in the hunt for income, but rents in England and Wales are just 0.6 per cent higher than a year ago - a rise of less than half the latest 1.6 per cent annual rate of inflation.

The average rent has risen by only £5 in the last 12 months, from £736 to £741, the buy-to-let index from LSL Property Services shows.

But rapidly rising house prices have seen the typical buy-to-let investor reap a big 10.3 per cent total return over the past year - adding up to almost £17,000 on average.

Rent growth: How rents have changed since January 2010

It means rents in April were 12.9 per
cent higher than January 2010. But this figure is less than Consumer
Prices Index inflation over the same period, which amounts to a total of
14.5 per cent, according to LSL

In fact, rents have consistently risen below inflation since 2010. Over the 52 month period since the start of 2010, there were 33 months where inflation was higher than rent rises.

April 2014 is the eleventh consecutive month in which average rent rises have been less than inflation. However, some regions have seen higher rises. Rents went up 4.3 per cent in the South West in 12 months,

The North West saw the greatest fall of three per cent. Rents in London and the South East are up 0.6 per cent.

The latest rent rises are also significantly below the long term mean for annual rises. Since the start of 2010, this has averaged 2.8 per cent, or more than four times the 0.6 per cent increase seen in the twelve months to April 2014.

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However,
taking into account price growth alongside void periods between tenants,
total annual returns on the average rental property are riding high.

Total
annual returns are now 10.3 per cent in the twelve months to April, up
from 5.8 per cent in the twelve months to April 2013.

In
absolute terms this means the average landlord in England and Wales has
seen a return of £16,887 in the last twelve months, with rental income
of £8,057 and capital gain of £8,830.

Rents: How much it costs in different areas in the country to rent on average

The latest index comes shortly after Ed Miliband outlined proposals to ban agent fees for tenants looking to move into a rental property.

But David Newnes, director of estate agents Reeds Rains and Your Move, believes tenants would actually be worse off if the change happened.

He said: ‘Poorly thought-through proposals could throw a spanner in the works. Firstly, rents would be higher. When tenant fees were banned in Scotland rents rose four per cent in the space of six months.

‘If tenant fees are banned and the landlord and letting agent have to bear the cost, there is every possibility letting agents and landlords will start pre-vetting tenants.

‘Finally, it should be remembered how not all landlords are “fat-cat investors”. Many only have one property used as their pension. Others are “accidental landlords” and rely on the rent to pay their mortgage. If tenants drop out at the last moment, this could mean hardship.

‘Missed mortgage payments would lead to possible repossession. New landlords would be wary of entering the market or extending portfolios. Many would exit – and again that would be bad for tenants.’

Rents vs yields: Both have remained fairly static so far in 2014

Despite lack of rent growth, yields remain steady

Gross yields on a typical rental property have held steady at 5.1 per cent in April, the same as in March 2014.

This is slightly lower than in April 2013, when the average gross yield on a rental property in England and Wales stood at 5.4 per cent.

If rental property prices continue to rise at the same pace as over the last three months, the average buy-to-let investor in England and Wales could expect to make a total annual return of 7.8 per cent over the next 12 months, equivalent to £13,600 per property, LSL concludes.

According to a separate poll by mortgage broker Mortgages for Business today, 60 per cent of buy-to-let investors will expand their property portfolio in the next six months.

The research, which polled 251 property investors, suggested landlord appetite for more purchases stems from the attractive yields available across a variety of investment property types.

Only three per cent of landlords say they are planning to trim their portfolios over the next six months, down from six per cent six months ago.

When asked about initial mortgage rate periods, five-year fixed-rate products came out as the favoured choice amongst property investors, with 34 per cent of the votes.

Nearly half made said they would like easier lending criteria, including relaxing age restrictions and removing non-property related income requirements.

The research also found, perhaps surprisingly, that 41 per cent of respondents indicated earning less than £25,000 a year in addition to rent. This is despite most buy to lenders stipulating landlords must have an additional annual income of around £25,000 in order to get finance.